Canada: Merger Notifications
Any merger in Canada is potentially subject to the application of Canadian merger control law. The Competition Act (Canada) (the Act), the source of Canada’s antitrust law, consists of substantive provisions that empower Canada’s commissioner of competition (the commissioner) to challenge mergers that are anti-competitive and procedural provisions relating to pre-merger notification. It is important to emphasise that these two sets of provisions are entirely distinct; the fact that a transaction is not pre-notifiable has no bearing on the application of the substantive provisions and vice versa.
In 2009 and 2010, substantial changes were made to Canadian competition law. On 12 March 2009, the Canadian government passed Bill C-10, which brought about the most significant amendments to the Act in 25 years. The result of these amendments has been to move Canada’s competition laws closer to those of the US, particularly with respect to cartel law and merger review.
This chapter briefly describes the substantive merger provisions of the amended Act. It then describes the Canadian pre-merger notification regime that applies to substantial mergers (whether or not any competition concerns arise). The third part of the article dis- cusses the Canadian merger review process and procedure. Finally, we draw the reader’s attention to other merger review statutes that may give rise to additional notification obligations, including the recently amended Investment Canada Act.
Substantive merger provisions
A merger is defined by the Act as the acquisition of control over, or of a significant interest in, the whole or part of a business. Under the substantive provisions of the Act, if a merger lessens or prevents, or is likely to lessen or prevent, competition substantially, the commissioner may make an application to the Competition Tribunal (the Tribunal) seeking remedies. The Tribunal is empowered to dissolve or block the merger or order divestment of all or part of the acquired business. There is also authority for the making of other remedial orders, but only with the consent of the party against whom the order is directed.
The principal issue will be whether a merger has or is likely to have a substantial anti-competitive effect in Canada. This usually requires a determination of whether there are overlaps between the parties. If there are, a standard market analysis is carried out to ascertain the market power of the merged entity and the competitive effects of the transaction.
The most important factors in assessing the effects of the merger on competition are the degree of concentration, barriers to entry, and the extent to which effective competition would remain in the market after the merger. The Act also provides that in assessing a merger, regard may be had to other factors such as the availability of substitute products, the extent of foreign competition, whether the target is a failing firm and potential efficiency gains. While an in-depth examination of the application of the substantive merger provisions is beyond the scope of this article, the approach to merger analysis in Canada is very similar to other jurisdictions (such as the US) that assess the competitive impact of a merger on the basis of whether it will substantially lessen or prevent competition. We would observe, however, that because of the small size of the Canadian domestic market, greater concentration may be acceptable in industries where a relatively higher market share optimises efficiency and international competitiveness.
Applications to challenge mergers may only be brought by the commissioner. Previously, the commissioner had to bring such applications prior to, or within three years after, the substantial completion of the merger. With the recent legislative changes, this period has now been reduced to one year.
Irrespective of whether a proposed merger is likely to lessen or prevent competition substantially in Canada, the Act requires merging parties to comply with the pre-merger notification requirements of the Act in respect of certain specified substantial transactions before such transactions can be completed. In order for a proposed transaction to be subject to pre-merger notification, the following requirements must cumulatively be satisfied:
- the parties to the transaction must satisfy the ‘size of parties’ threshold;
- the proposed transaction must fit into one of five specific categories and exceed the ‘size of transaction’ threshold; and
- the proposed transaction is not otherwise exempt from pre- merger notification.
Size of parties threshold
Pre-merger notification is not required unless the parties to the pro- posed transaction, together with all of their affiliates1, have aggregate assets in Canada or gross annual revenues from sales in, from and into Canada that exceed C$400 million. In the case of a share acquisition, the parties to the proposed transaction are deemed to be the purchaser and the corporation the shares of which are being acquired.
Size and category of transaction
In addition to the size of parties threshold, the proposed transaction must fall within one of five stipulated categories and the value of the transaction must meet the applicable size of transaction threshold. The size of transaction threshold is also based on asset value and annual revenues. An important difference is that the size of parties threshold refers to revenues in, from and into Canada, whereas the size of transaction threshold is limited to revenues in and from Canada. While the existing size of parties threshold of C$400 million remains unchanged, the 2009 changes to the Act have increased the size of transaction threshold from C$50 million to C$70 million. This size of the transaction threshold is revised annually with further increases or decreases using a formula based on nominal gross domestic product. For 2012, the size of transaction threshold increased to C$77 million from the 2011 threshold of C$73 million.
Asset and revenue calculation
The discussion below identifies the five categories of notifiable transactions and their respective thresholds. If a proposed transaction does not strictly fit into one of the following categories, there is no obligation to give notice thereof.
In general terms and with certain exceptions, the assets and revenues are to be calculated using book values based on the most recent annual audited financial statements for the relevant entity.
Acquisition of assets
Pre-merger notification is required in respect of the acquisition of assets of an operating business in Canada that have an aggregate book value or generate gross annual revenues from sales in and from Canada in excess of C$77 million. For purposes of the Act, an operating business means a business undertaking in Canada to which employees employed in connection with the undertaking ordinarily report for work.
Acquisition of voting shares
The acquisition of voting shares will be subject to pre-merger notification if a sufficient percentage of such voting shares is acquired; the acquired corporation or a subsidiary corporation thereof carries on an operating business in Canada; and the C$77 million size of transaction threshold is met.
A voting share is defined as a share that carries voting rights under all circumstances or by reason of an event that has occurred and is continuing. While this definition is somewhat ambiguous and subject to debate in Canada, in most circumstances it is clear whether the acquired shares are voting or not. The typical common share is a voting share.
The percentage threshold of voting shares that must be sur- passed in order to trigger pre-merger notification is 20 per cent in the case of a public corporation, 35 per cent in the case of a private corporation, and 50 per cent if the purchaser already holds more than 20 per cent or 35 per cent of the voting shares, as the case may be. The acquisition of voting shares that does not cause the acquirer to surpass an applicable threshold is not notifiable (for example, going from 40 per cent to 50 per cent is not notifiable).
Finally, the aggregate book value of any of the assets in Canada of the acquired corporation and its subsidiary corporations (other than assets that are shares of any of those corporations) or the annual gross revenues from sales in and from Canada generated by such assets must exceed C$77 million.
Pre-merger notification obligations apply in respect of the amalgamation of two or more corporations where: one or more of those corporations carries on an operating business, or controls a corporation that carries on an operating business; the aggregate book value of the assets in Canada of the continuing corporation (or by corporations it will control) or the annual gross revenues from sales in and from Canada generated by such assets exceed C$77 million; and each of at least two of the amalgamating corporations, together with their affiliates, have assets in Canada or annual gross revenues from sales in, from and into Canada that exceed C$77 million.
The Canadian competition authorities treat the ‘reverse triangular merger’ under US law which affects a Canadian business (where a parent company merges a wholly owned subsidiary with a target company resulting in the former shareholders of the target company receiving parent company shares) as an amalgamation for the purposes of determining pre-merger notification requirements in Canada.
A ‘combination’ is the combination of two or more persons to carry on business otherwise than through a corporation where one (or more) of those persons proposes to contribute to the combination assets that form all or part of an operating business carried on by such person or corporations controlled by such person. Partnerships formed in this manner would be considered to be a combination.
Pre-merger notification in respect of the formation of a combination would arise where the aggregate book value of any of the assets in Canada to be contributed to the combination or the annual gross revenues from sales in and from Canada generated by such assets exceed C$77 million.
Acquisition of an interest in a combination
The acquisition of an interest in a combination that carries on an operating business is subject to pre-merger notification if a sufficient interest is acquired and the size of transaction threshold is met.
In order for the pre-merger notification provisions to apply, the acquirer must, as a result of the proposed acquisition of the interest, acquire an interest that entitles the acquirer to more than 35 per cent of the profits of the combination or more than 35 per cent of its assets on dissolution. If the acquirer is already so entitled, then the threshold is 50 per cent.
The size of transaction threshold is similar to the other categories, in that the notification obligation can only arise if the aggregate book value of any of the assets in Canada of the combination or the annual gross revenues from sales in and from Canada generated by such assets exceeds C$77 million.
There are two categories of exemption from the requirement to file a pre-merger notification. The first category consists of obtaining a discretionary exemption from the commissioner. Thus this first category still requires interaction of some kind with the regulatory authorities. The second category exempts the merging parties from providing any notice or requiring any discretionary waivers from the authorities.
Where the commissioner is of the view that a proposed transaction does not give rise to any competition concerns, she may issue an advance ruling certificate (ARC). By issuing an ARC, the commissioner waives her ability to later challenge the proposed merger under the substantive merger provisions of the Act. ARC requests are usually made in cases where the transaction has no prima facie anti-competitive effect. If an ARC is obtained, pre-merger notification is not required.
Where there has been an application for an ARC, but the commissioner is not prepared to issue an ARC (usually to preserve her ability to challenge the merger in the following year) and the applicants supplied the commissioner with information that is substantially similar to what would be contained in a formal notification, the commissioner may waive the obligation to file a formal notification.
There are a number of statutory exemptions to pre-merger notification (although, as noted above, the substantive merger provisions may still apply). The statutory exemptions can be summarised as follows:
- a transaction all the parties to which are affiliates of each other;
- asset securitisations;
- joint ventures governed by a written agreement that imposes on one or more of the parties an obligation to contribute assets; governs a continuing relationship among the parties; restricts the range of activities of the joint venture, and contains provisions that would allow for its orderly termination; provided that there is no change in control over any party to the joint venture that results from the joint venture;
- a transaction exempted by the minister of finance;
- the acquisition of real property or goods in the ordinary course of business if the person who proposes to acquire the assets would not, as a result of the acquisition, hold all or substantially all of the assets of a business or of an operating segment of a business;
- acquisition of voting shares for the purpose of underwriting such shares;
- an acquisition that would result from a gift, intestate succession or testamentary disposition;
- certain acquisitions resulting from a foreclosure or default or forming part of a debt work-out made by a creditor in or pur- suant to a credit transaction entered into in good faith in the ordinary course of business; or
- the acquisition of a natural resource property by a person who will incur expenses to carry out exploration or development activities with respect to the property.
Notification procedure and process
If a proposed transaction is subject to a pre-merger notification requirement, the parties thereto may not close the transaction unless notice thereof has been given to the commissioner and the applicable waiting period (initially 30 days) has expired or has been waived by the commissioner. Canada’s waiting period has been changed through the recent amendments to the Act which bring the Canadian regime more closely in line with the US’s ‘second request’ sys- tem. Previously, if the commissioner wanted information beyond that required by the parties in their pre-notification filings, she had to seek court orders for the production of information and documents (in the absence of voluntary production). Now, the Bureau is authorised, without judicial oversight, to issue a request for supplementary information ‘relevant to the commissioner’s assessment of the proposed transaction’ within 30 days after submission of pre-notification filings. If such a ‘supplemental information request’ (SIR) is issued, then the waiting period is automatically extended until 30 days after a complete response to the SIR is filed. The US experience with second requests has shown them to be time-consuming and costly. The impact of this provision in Canada remains to be seen and will depend on how the Competition Bureau applies these broad powers, although to date, SIRs issued by the Commissioner have been significantly less burdensome than the typical US second request.
Information required by the notification form includes a description of the transaction, the identity of the parties and their affiliates, a description of the principal businesses, categories of products, the most important customers and suppliers and the geographic regions of sales. The parties are also required to submit documents prepared or received by an officer or director for the purpose of evaluating the competitive impact of the proposed transaction (similar to item 4(c) documents under Hart-Scott-Rodino in the US) and the transaction documents.
Although it is not necessary to file more information than required by law (ie, the form), most notifications of a merger are accompanied by a competitive analysis, which often includes additional information in relation to market definition, the degree of competitive overlap, market concentration and barriers to entry. Although parties are legally entitled to close after the expiry of the statutory waiting period, they generally do not do so until the commissioner has completed her review and cleared the transaction (which may take longer than the statutory waiting period) because the commissioner can challenge a closed transaction. The Competition Bureau (the agency that assists the commissioner in the enforcement of the Act) will normally advise the parties at the beginning of a review how long it is likely to take. The service-standard time frames utilised by the Bureau are 14 calendar days and 45 calendar days, depending on the degree of complexity of the antitrust issues raised. However, where a SIR is issued, the service standard is 30 calendar days and commences the day on which the commissioner has received a complete response to the SIR from all SIR recipients. The commissioner signals the completion of her review by the issuance of a no-action letter that indicates that she is of the view that there are no grounds to challenge the transaction.
As the Bureau can review and challenge mergers even if they are not subject to mandatory notification, parties may, in some circumstances, choose to voluntarily seek clearance of a non-notifiable transaction which raises competition issues.
Application for an advance ruling certificate
As indicated above, the parties may also apply for an ARC in respect of the proposed merger. This may be done in conjunction with or in lieu of the filing of the formal notification form.
Generally speaking, if parties are confident that an ARC will be issued, a formal notification form is not filed. Where, however, there is a risk that an ARC will not be issued, or if the transaction is subject to time pressures and the parties want the comfort of being able to rely on the expiry of the waiting period, a formal notification form is typically filed.
The filing fee in respect of a merger is C$50,000. This filing fee applies irrespective of whether a formal notification form is filed or an ARC is applied for, or both. Even seeking an ARC or a no-action letter in the case where no pre-merger notification obligation arises is subject to the C$50,000 fee.
Other merger statutes
Although a detailed discussion of other merger statutes tangentially related to the Competition Act is beyond the scope of this article, we would like to draw the attention of the reader to the following two statutes that might apply to a proposed merger:
Investment Canada Act
If the acquirer is ultimately controlled by a non-Canadian, then the proposed acquisition may require approval from the federal minister designated pursuant to the Investment Canada Act. Subject to certain industry exclusions, where a Canadian business has assets of C$330 million2 or more and is acquired, directly, by a company controlled in a country that is a member of the World Trade Organization (a ‘WTO investor’) or is disposed of by a WTO investor in such circumstances, the proposed transaction is reviewable under the ICA. New Investment Canada Act regulations will come into force later this year dramatically increasing the reviewable threshold to C$600 million for investors from WTO member nations. Thereafter, the threshold will be increased to C$800 million and C$1 billion two years and four years respectively after the effective date (with further increases based on a prescribed formula).
If the acquisition of control of a Canadian business is subject to review under such statute, the parties must satisfy the minister that the transaction is of net benefit to Canada before the transaction can be implemented. Factors that are relevant in the determination of net benefit include the effect of the proposed transaction on competition, economic activity, Canadian participation, productivity, innovation and the compatibility of the investment with national policies. The initial review period under such statute is 45 calendar days, which can be extended by another 30 calendar days. The Investment Canada Act also contains a national security review provision which gives the government the power to review proposed investments on the basis of ‘reasonable grounds that an investment by a non-Canadian could be injurious to national security’. This review power is broad and it remains to be seen how the term ‘national security’ will be defined when problems are encountered under this provision.
Canada Transportation Act
If a proposed transaction is subject to pre-merger notification under the Competition Act and the transaction involves a transportation undertaking, the merging parties will also have an obligation to file a notification with the minister of transport and the Canadian Transportation Agency pursuant to the Canada Transportation Act and seek any required approvals thereunder.
- For the purposes of the Act, one corporation is affiliated with another corporation if one of them is the subsidiary of the other or both are subsidiaries of the same corporation or each of them is controlled by the same person. A corporation is a subsidiary of another corporation if it is controlled by that other corporation. If two corporations are affiliated with the same corporation at the same time, they are deemed to be affiliated with each other. A partnership or a sole proprietorship is affiliated with another partnership, sole proprietorship or a company if both are controlled by the same person. Note that a partnership is not necessarily affiliated with the entity that controls it. Also note that the Act has further rules that delineate the manner in which control is exercised.
- This is the 2012 threshold. This threshold is adjusted at the beginning of each calendar year in accordance with an inflation index.